While, in an ideal world, no one would have debt in retirement, for most people that picture is not reality. With over two-thirds of Americans aged 65 to 74 and half of those age 75 and older carrying debt, we must know how to handle this potential budget-buster. Here are 3 tips for handling debt during retirement.
Since your income in retirement is likely less than it was while you were still working, you are less likely to have the cash flow to eliminate your debt now. Hoping for the best will not solve the problem.
If you try to keep up the payments on your debt with your lower retirement income, you might be tempted to tap into your retirement account. Doing so will cause higher taxes, if you funded the account through pre-tax deductions from your paycheck. This means you might have to withdraw $125,000 or more from your 401(k) to pay off the last $100,000 of your mortgage, for example. You will be more likely to run out of money in retirement.
- Reduce Your Debt
It can make financial sense to pay off your debt, if you can do so without taking large withdrawals from your retirement account. This strategy can work for smaller debt, like credit cards. For larger debt, you might need to use a different approach.
If you owe a significant amount on your mortgage and you no longer want or need such a large house, downsizing can be a way to get out of debt and simplify your life. If feasible, sell your home and use the proceeds to buy a smaller house with no mortgage. A smaller house can also save you money on utilities, property taxes and upkeep. If you are not a huge fan of yard work or house cleaning, a smaller place can require less maintenance.
If you still have the RV from family road trips, but you do not expect to use it again since the kids have grown, sell it and pay off that and other debt. You will also save money on insurance, state taxes and licensing fees.
- Refinance Your Debt
Some of the best refinancing packages are only available, when you are still employed full-time. Therefore, this move will take planning. Traditional refinancing means taking out a new loan, but recasting lets you keep your loan and lower your payments by using a lump sum to pay down the balance. Reverse mortgages can be an option, if you are 62 or older and owe less than half of your house’s market value, but these loans can backfire with devastating consequences.
- Pay Off High-Interest Debt with Lower Interest Credit
If you have high-interest debt, it might make financial sense to get a home equity line of credit (HELOC) to pay off the credit cards. Be self-disciplined enough not to run the cards back up again. Let’s say you had an unexpected medical crisis and had to pay your co-pays, co-insurance, and deductibles with a credit card. Paying 4 or 5 percent interest on a HELOC to get out from under credit card interest of 22 percent or higher is a smart move.
Talk with an elder law attorney in your areas about how your state’s rules can vary from the general law covered in this article.
The Motley fool. “Retiring with Debt? Here’s How to Manage It.” (accessed October 10, 2018) https://www.fool.com/retirement/2018/06/28/retiring-with-debt-heres-how-to-manage-it.aspx
U.S. News & World Report. “7 Steps to Pay off Debt in Retirement.” (accessed October 10, 2018) https://money.usnews.com/money/retirement/articles/2018-05-17/7-steps-to-pay-off-debt-in-retirement
NerdWallet. “Managing Debt in Retirement Takes Some Planning.” (accessed October 10, 2018) https://www.nerdwallet.com/blog/finance/loans-before-retirement/